RCA claims USD 55 million capital gains tax
The giant Israeli fertilizer producer, ICL, on Thursday announced that it has terminated its potash mine development project in the Afar Regional State, north eastern part of Ethiopia.
According to a statement issued by ICL, following a meeting held on October 5, the board of directors instructed the management to take all necessary actions towards termination of the project. ICL took over the Afar Dallol potash mine development project in 2015 after it bought all the shares of Allana Potash, the Canadian company that owned the concession. The company had a plan to develop the vast potash deposit estimated at three billion tons and build three fertilizer blending plants at a total cost of one billion dollars.
Following a disagreement with the Ethiopian Revenues and Customs Authority (ERCA) over a controversial tax claim to the tune of USD 55 million, the board of directors of ICL this week decided to terminate the project. “The board has taken this decision in view of the Ethiopian government’s failure to provide the necessary infrastructure and regulatory framework for the project and follows the Ethiopian tax authority’s rejection off Allana Afar’s appeal regarding the unjustified and illegal tax assessment which Allana Afar has declined to pay. In particular, as already notified to the government, Ethiopia’s acts and missions have been in breach of, inter alia, the protections to which the investment is entitled under an international investment treaty,” the company’s statement read.
The net value of the investment in the project as of June 30, 2016 was approximately USD 170 million. Following the board’s decision the company will recognize in its financial reports and impairment of the investment amount as well as a provision for the expected closing costs.
The Reporter’s attempt to get the response of ERCA was unsuccessful.
The Ministry of Mines, Petroleum and Natural Gas is stunned by ICL’s decision to pull out of Ethiopia. The company’s decision is not yet to be formally communicated to the ministry. Minister Tolossa Shagi told The Reporter that the decision is a surprise to the ministry. According to Tolossa, the mining license of Allana Potash is not yet transferred to ICL. “The company came to Ethiopia after it finalized transaction with the rightful owner of the concession abroad. We told them that it has to be processed according to Ethiopia’s mining law. We were processing the mining license transfer. We did not stop their activity because we need the development. They imported machineries and were working on the field and parallel we were working on the license transfer. We did not want to stop them because ICL is a big company which has investments in different countries,” Tolossa told The Reporter.
The minister said that ICL was informed of its tax obligations. It was told to settle the VAT and withholding tax arrears of Allana Potash. In addition, ERCA requested it to pay USD 55 million capital gain tax. Tolossa said there was a general consensus on the tax obligations but when it comes to settling the payment the company complained that the stated amount was too much.
“They could appeal to the tax authority. There was no need to rush to terminate the project. We have advised them to appeal to the tax authority and review the capital gain tax amount. But they did not do that,” Tolossa said.
With regards to infrastructure Tolossa said the government was ready and willing to develop the infrastructure in the region where the potash deposit is found. “We were considering to upgrade build the road that stretches from Mekele to Dallol. We were also to construct a new road that links the resource to the Port of Djibouti.” He said that a high-level committee drawn from the Office of the Prime Minister, the Ministry of Transport, Ministry of Water, Irrigation and Electricity was established and was working on the infrastructure development project. “It would take the company three years to build the mining plant but the government was committed to complete the road construction within a year and a half. And the company was satisfied with the responsiveness of the government on infrastructure development. We are now confused with the statement they issued.”
Tolossa told The Reporter that the ministry is expecting a formal termination letter from the company. “We are trying to communicate with them. I have spoken to the manager over the phone. He told me that they would come in person and explain to us why they decided to terminate the project. Our door is always open for negotiation. We can still discuss the matter,” the minister said.
The management of ICL this week informed its employees in Addis Ababa that it is going to terminate its project in Ethiopia. Employees working in the field in Dallol are not yet informed of the company’s decision.
A source close to the project told The Reporter that the USD 55 million capital gain tax scared off ICL. The source said ICL conducted due diligence on Allana Potash before it bought the company for one year. “It assumed the assets and liabilities of Allana. There was some ten million dollars VAT and withholding tax payable to the tax authority which they agreed to settle. But they did not pay that,” the source said.
According to sources, ICL was shocked by ERCA’s claim of USD 55 million. “They did not buy the resource or the land. They bought shares of Allana in Canada. They were not supposed to pay capital gain tax. You do not scare off a giant company with commendable reputations like ICL which is committed to invest over one billion dollars by demanding cumbersome upfront payments. This is ridiculous,” sources said.
According to sources, ICL could go to international court charging the government of breaching international investment protection treaty. “The ICL fiasco will have repercussions. Other mining firms will be frightened. It will scare of FDI to the country’s mining sector,” sources said.
An independent legal expert The Reporter talked to said that the government is entitled to claim capital gain tax even if the transaction took place in Canada. “Multinational mining firms transfer concessional rights in Africa and the countries do not benefit from the transitions. Even if the deals are made overseas the countries are entitled to capital gain tax,” the legal expert said. However, she said that the amount could be debatable.
ICL is the 6th largest potash fertilizer producer in the world and the 2nd in west Europe. ICL is a publicly traded company listed in the New York Stock Exchange (NYSE) with a capital of 12 billion dollars. Headquartered in Tel Aviv, the company earns an annual turnover of over six billion dollars. The company was established by the State of Israel in 1968 and was privatized in the 1990s.
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